Fixed and ARM Refinance Loans – Are ARMS Still an Option

Published by julia | Filed under Buyer / Seller Tips, Market Trends, Real Estate

When the bottom fell out of the mortgage market, potential home buyers looked at the ARM loan as being the worst loan to choose. The ARM has its place in the mortgage and refinance world, but that does not mean it should be used by people who can only afford the lower repayment rate. Choosing between a fixed rate and ARM loan, the home buyer should look at all the costs of each loan before making the final decision.

A fixed rate loan will cost the new homeowner more money, hands down. But, this higher loan payment comes with the benefit of never raising during the loan maturation. The same mortgage payment the homeowner makes on the first month of the loan is the payment they will make throughout the loan. The ARM, on the other hand, cannot say the same.

The ARM, or adjustable rate mortgage, is available for new home loans and refinance loans. The ARM is often blamed for the rise in foreclosures in many cities. The ARM payment often starts out lower and then rises over time. The homeowner could begin repaying the loan with an interest only option and a very low payment. When the loan adjusts, that payment could double or even triple depending on the current interest rates.

If the fixed rate or ARM loans both offer good benefits, the home buyer could be looking for a hybrid loan. A hybrid loan offers both ARM and fixed rate characteristics. There are many different types of hybrid home loans, so the homeowner looking to refinance or the potential home buyer shopping for the right loan will need to speak with their lender about the hybrid loan options.

Now on to the choice…

The trouble with many novice home buyers the lure of the ARM loan. The ARM may be pushed by the lender due to the lower upfront payment. If, during the adjustment of the loan, the homeowner will not be able to keep up with the payments (even hypothetically) they should not enter into an ARM. These loans are great for people who buy a home for a great deal and believe the value of the home will rise before the loan adjusts. This is the art of investing and not traditional home buying.

Homeowners can often afford the fixed rate loan by choosing a smaller home or a home with fewer features. If the home price is lower and thus the mortgage lower, the payment will be lower. It is better to afford the home you live in then lose the home you love.